In response to the growing number of commercial rent disputes due to the drop in property values due to Covid and the crisis in retail and leisure, RICS has launched a Commercial Rental Independent Evaluation Service to help landlords and tenants negotiate rent payments and values during the coronavirus pandemic.
The service is designed to ensure a “clear, balanced dialogue between landlord and tenant,” including an incisive analysis of the tenant’s grounds for non-payment and the landlord’s prerequisites for making concessions, and comes in response to MHCLG’s recently launched Code of Practice for commercial property relationships during the COVID-19 pandemic.
With retail, hospitality and the leisure sectors in financial turmoil things won’t stay as they were and new valuations will be needed by landlords, tenants and lenders, and unfortunately, increasingly, insolvency professionals.
Valuations rely on transactions in the market and there may still be sufficient to provide enough evidence to support valuations, but many areas remain where there is considerable uncertainty in the market which still needs to be tackled in the short term.
This may be resolved before too long, either because they economy is picking up, or because there are more forced insolvency sales; it all depends on the long-term impact of Covid and how fast the economy can recover – will we get a V, U or L shaped recovery?
Valuation is both an art and a science and valuers have to distinguish between what is “value” and what is “worth”. Value would be defined as the “market value” of a property determined by comparables and tranactions in the market locally. Worth is a measure of the a property’s value to a particular person or business. For example, a premise would be of more value to a neighbouring business wanting to expand; they would generally be willing to go higher in price to secure a purchase than an average buyer.
The difficulty surveyors have is that with fewer transactions taking place there’s always the possibility of a “long tail” price, an unusual price paid because it’s worth more to the individual purchaser, or if prices are affected by a sudden market recovery which cannot be sustained. These are the damagers faced by the professionals at this time.
Other factors include the possibility of re-purposing of a building given its design, layout, its location, tenant demand and the lack of any planning restrictions. Therefore the potential value after conversion taking into account the cost involved has a bearing on a building’s current value. This is most relevant in sectors hardest hit by structural changes in the market and Covid: retail, hospitality and leisure, for example.
The RICS Code of Practice contains recommendations that landlords and tenants use a third-party mediator to help with any payment negotiations during this difficult period of time.
To ensure the new service would help all parties involved, RICS consulted widely across the sector. Following the consultation, the RICS product aims to alleviate the pressure on both tenants and landlords and:
Give tenants a ‘safe space’ to articulate their difficulties and have landlords recognise them
Ensure landlords have a rigorous dispute resolution process to ensure all parties can maintain a positive working relationship post COVID.
As part of the process, the Commercial Rental Independent Evaluation Service rules provide a tight timetable and clear structure for evidence to be presented and examined by an RICS appointed independent evaluator.
The service also sets out a clear and affordable schedule of fees, for both small and large properties, ensuring the costs are matched to the size of the dispute. Evaluators also and aim to provide a resolution within 28 days.
Dr John Fletcher, RICS director of dispute resolution, said: “We hope that this service will contribute to the recovery of a fully functioning commercial market as the sector navigates this difficult time period, and will provide landlords and tenants with the inclusive and safe space they need to work out how to resolve any disputes.
“RICS recognises that parties need a safe, unbiased pair of hands, appointed and overseen by a manifestly independent institution to guide them through these unprecedented times, As a provider of dispute resolution services in the commercial sector for nearly forty-five years, our panellists include the most experienced practitioners in the market, who can help restore confidence.”
Steph Yates, senior consultant at Remit Consulting, commented: “While the pandemic was something no one expected, the fallout over non-payment of rents is leading to a fractious break-down of some landlord and tenant relationships, which will have long-lasting impacts on the sector, investments and the economy.
“Our research suggests that the rental income lost to the UK’s property industry totalled £1.5 billion for the March quarter alone, to the detriment of the annual returns for pension funds, insurance businesses, REITS and other investments. At some stage this will begin to impact the incomes of large parts of the population and the wider economy.
“The Government’s Code of Practice called for landlords and tenants to act responsibly and suggests the use of a third-party mediator to help. The introduction of RICS’ Commercial Rental Independent Evaluation Service is a means to resolve these outstanding disputes in a cost effective and timely manner. The sooner landlords and tenants can agree terms, the sooner we will see a semblance of normality return to commercial property.”